9.1 The Objectives Of Goverment Economic Policy Flashcards
What is a policy objective?
Target or goal the gov wants to achieve
What are 4 of the UK’s policy objectives?
-achieve economic growth, improve living standards and levels of economic welfare
-create and maintain full or low unemployment
-control of limit inflation (to create price stability)
-attain satisfactory balance of payments (the avoidance of external deficit which may create an exchange rate crisis)
Diagram for short-run and long-run economic growth
Xxxxx
What is short-run economic growth?
Growth of real output resulting from using idle resources including labour, thereby taking up slack in the economy
What is long-run economic growth?
Increase in the economy’s potential level of real output and and outward movement of the economy’s PPF
What is short run economic growth often referred to as?
Economic recovery
What is long run economic growth shown by?
Movement from PPF1 to PPF2
What is short-run economic growth shown by?
Movements of point towards the frontier of a PPF
What is GDP?
Sum of all the goods and services produced in an economy in a year
What is nominal GDP?
GDP measured at the current market prices without removing the effects of inflation
What is real gdp?
Me side of all the goods and services produced in an economy adjusted to inflation or price changes
It transforms changes in nominal GDP(which is measured in money terms)and reflects the total output of the whole economy
What is a recession?
6 months or more of negative economic growth declining real national output
What is the eurozone?
Group or EU countries who replaced their national currency with the euro
Diagram for annual UK economic growth compared to the eurozone?
Xxxx
How many decisions of full employment is there?
2
What is William beverages definition of full employment?
When unemployment falls to 3% of the labour force
What is full employment according to the free market definition?
Occurs at the market clearing real wage rate where the number of workers wanting to work equals the number of workers employers are willing to hire
Diagram for full employment in an economy
Xxxxxx
What is the second definition of full employment from free market economists?
When Economy’s aggregate labour market at the market clearing wage real wage rate
Where number of workers willing to work =number of workers employers wish to hire
(Full employment occurs when there is no unemployment)
Why will there always be some unemployment in the county?
Because the economy is constantly changing
What are the two methods to measure unemployment in the UK?
Claimant count
Labour force survey
What is the claimant count method?
According to those who claim unemployment
What is the labour force survey method?
Quarterly sample survey of households in the UK(purpose to provide info on UK labour market)
-survey seeks information on respondents personal circumstances and their labour market status during a period of 1-4 weeks
Why did the UK gov drop the claimant count for the labour force survey?
It is an incredibly poor proxy for overall unemployment levels
What method claims higher unemployment?
Claimant count measure
What is inflation?
Persistent or continuing rise in the average price level
What is deflation?
Continuing tendency for the average price to fall
What is disinflation?
When the rate of inflation is falling but still positive
What does absolute price stability require?
Inflation rate of 0
What does controlling inflation mean in the UK?
Achieving a low inflation rate
(Target 2%)
What is negative inflation?
Deflation
What is a price index?
An index number showing the extent to which a price or basket of prices has changed over a month quarter or year in comparison with the prices in a bad year
What is the consumer price index?
Official measure used to calculate the rate of consumer price inflation in the UK(calculates the average price increase of a basket of 700 different consumer goods and services
What is the retail price index?
Measure formerly used to calculate the rate of consumer price inflation in the UK
What is indexation?
The automatic adjustments of items such as pensions and welfare benefits to changes in the price level, through the use of a price index
What is the consumer index used for ?
Measure the rate of consumer price inflation
What used to be the dominant price index and what has taken its place since 2011
Used to be retail price index
Now is consumer price index
What had the CPI also been used for.
The indexation of welfare benefits
What is the ONS?
The office of national statistics
Why did the ONS say the RPI is a bad measure for inflation?
At times overestimating and underestimating changes in prices
How is core inflation calculated?
Stripping out volatile items such as food and fuel
What is headline inflation influenced by?
Short term factors
What is underlying inflation?
Measured by trying to get rid of inflationary noise created by price fluctuations
Similar to core inflation
How do u calculate the rate of increase of real gdp
Rate or increase of nominal gdp-rate of price inflation
What is a balance of payments?
Record of all the currency flows into and out of a county in a particular period
Current account def
Measures all the currency flows into and out of a country in a time period in payment for exports and imports of goods and services, together with income flows (previously known as income flows and transfers)
What are exports?
Domestically produced goods or services sold to residents in other nations
What are imports?
Good or services produced in other countries that are sold to residents of this country
Balance of trade?
Difference between Monet value of a country’s imports and its exports
Largest component of a countries balance of payments on current account
Balance of trade deficit?
When the money of a countries imports > value of exports
Balance of trade surplus?
Value of exports > value of imports
What makes up the current account
Exports and imports
What is a satisfactory balance of payments?
Situation where current account is in equilibrium or a small surplus or sustainable deficit
What is balancing the budget?
When government spending=gov rev
G=T
What is budget deficit?
When gov spending > tax rev
Represents a net injection of demand into circular flow of income and hence is expansionary
What is policy conflict?
When two policy objectives cannot be achieved
The better performing in one objective, the worse in the other
Trade-off between policy objectives?
Although it may be impossible to achieve two desirable objectives at the same time policy-makers can accept a combination between the two extremes
(Inflation and unemployment-Philips curve)
When does a trade off occur?
When two events are mutually exclusive
What are the main policy trade offs?
Full employment and economic growth-satisfactory balance of payments and exchange rates
Full employment and economic growth-control of inflation
Economic growth-greater income inequality
Current living standards-future living standards
What are Keynesian economists?
Followers of John Maynard Keynes govs should mange the economy particularly through use of fiscal policy
Who are pro free market economists?
Dislike gov intervention in the economy and prefer free markets
What is monetary policy?
The use by the gov and it’s agent the Bank of England of interest rates and other monetary instruments to try and achieve the governments policy objectives
What is fiscal policy?
The use by the government spending and taxation to try and achieve the gov policy objectives
What is the balance of payments equilibrium?
Where a deficit or surplus on the current account of the balance payments is exactly matched by capital inflows or outflows in the other parts of the bank me of payments
When is the Keynesian era
1945-1979
